Motivating ESG Activities Through Contracts, Taxes and Disclosure Regulation

53 Pages Posted: 27 Jan 2022 Last revised: 18 May 2024

See all articles by Jonathan Bonham

Jonathan Bonham

University of Illinois at Chicago

Amoray Riggs-Cragun

University of Chicago Booth School of Business

Date Written: May 18, 2024

Abstract

Using a model where firm managers can influence the entire distribution over financial and ESG outcomes, we examine how ESG activities can be motivated through 1) contracts, 2) taxes and 3) disclosure regulation. We show that ESG-performance-based shares incentivize managers to engage in green innovation, that is, to increase the correlation between financial and ESG outcomes. While executive compensation contracts can motivate changes in a firm's ESG activities, these changes are limited by how much shareholders actually value ESG. Taxes can align shareholder objectives more closely with societal objectives, but can have unintended consequences. Finally, disclosure regulation can empower markets to self-discipline by providing information about firms' ESG technologies, as this enables powerful ESG-conscious firms to compete against brown firms and cooperate with green firms. However, disclosure regulation can hurt ESG outcomes if powerful firms do not value ESG, and it has little effect when market power is disperse.

Keywords: ESG, CSR, shareholder welfare, taxes, ESG disclosure regulation, optimal contracting, executive compensation

JEL Classification: D86, M41, Q56, Q58

Suggested Citation

Bonham, Jonathan and Riggs-Cragun, Amoray, Motivating ESG Activities Through Contracts, Taxes and Disclosure Regulation (May 18, 2024). Chicago Booth Research Paper No. 22-05, Available at SSRN: https://ssrn.com/abstract=4016659 or http://dx.doi.org/10.2139/ssrn.4016659

Jonathan Bonham

University of Illinois at Chicago ( email )

601 S. Morgan
Chicago, IL 60607

Amoray Riggs-Cragun (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

HOME PAGE: http://www.riggscragun.com/

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